Dallas/Fort Worth Chapter 13 Consumer Bankruptcy Conference

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1 Dallas/Fort Worth Chapter 13 Consumer Bankruptcy Conference Play Under Review Ethics and Loan Modifications: Confessions of a Creditor s Rights Attorney Panel: Edward J. Boll III, Esq., Lerner, Sampson & Rothfuss, LPA Monday, October 22, : a.m. Noon Arlington Convention Center Arlington, Texas EDWARD J. BOLL III, ESQ. LERNER, SAMPSON & ROTHFUSS A Legal Professional Association 120 East Fourth Street Cincinnati, OH Cellphone: (513) Telephone: (513) Telecopier: (513) EJB@LSRLAW.COM I. Loss mitigation A. Loss mitigation and Bankruptcy B. Loan Modification: The Players-Who decides if I receive a modification? C. Loss Mitigation at Lerner, Sampson and Rothfuss and options available to borrowers/debtors D. The National Mortgage Settlement II. The Statistics 1 P age

2 I. Loss Mitigation A. Loss mitigation and Bankruptcy 1. Bankruptcy Judges can only encourage loss mitigation within the mandate provided by the Bankruptcy Code. Most importantly, judges must preserve the statutory rights of creditors. Section 1322(b)(2) expressly prevents the bankruptcy court from altering the rights of mortgage lenders with claims on the debtor s primary residence. Specifically, a Chapter 13 plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor s primary residence.... This clause prevents debtors from creating a plan that binds the lender to a different interest rate, term, monthly payment amount, or any other change in a contractual mortgage obligation. Borrowers in bankruptcy are increasingly requesting loan modifications. A servicer-offered modification can reduce a fixed rate, fix an adjustable interest rate, extend the term of the note, and capitalize outstanding delinquencies and fees. Further, the US Treasury Department, as it continues to revamp the Home Affordable Modification Program (HAMP), now encourages principal write-downs on loans. 2. Welcome to Bankruptcy Letter - One of the best methods to initiate action to process modifications on active loans in Bankruptcy is for the servicer to prepare a loss mitigation letter/package to send to Debtor s counsel at the outset of the Bankruptcy Case. Such a letter or package will detail the various workout options that may be available to the Debtor, should he or she qualify. The loss mitigation letter may be sent concurrently with, or after sending, a Proof of Claim, Motion for Relief from Stay or other Bankruptcy filing. Sending such a letter is much more successful in the Bankruptcy context as often times the borrower is represented by legal counsel for the first time. 4. Chapter 7 Cases 2 P age In a chapter 7 proceeding, the debtor s property becomes property of the bankruptcy estate; and the chapter 7 trustee has control of the property to sell, dispose, or abandon as she deems in the best interest of creditors. A loan modification may be done in a chapter 7 case. An abandonment of the property from the trustee and relief from the automatic stay is desirable before the finalization of a loan modification. After all, modifying a loan secured by a piece of real property that the Trustee intends to administer is futile. The loan modification can also be incorporated into a reaffirmation agreement where the changed or modified terms would be set forth. Official Bankruptcy Forms B240A/B ALT (Form 240A/B ALT) (Reaffirmation Agreement) (04/10) provide opportunities for modified loan terms. In most jurisdictions, a loan modification may also be done after a discharge of the debts. The key to remember in this instance is that the loan modification cannot reimpose personal liability upon the borrower. The loan modification needs to specifically recognize the discharge and indicate that the modification is not obligating the borrower personally on the debt. With respect to HAMP modifications, if the Debtor has received a chapter 7

3 bankruptcy discharge and did not reaffirm the mortgage debt, the following language must be inserted in the Home Affordable Modification Agreement: I was discharged in a chapter 7 bankruptcy proceeding subsequent to the execution of the Loan Documents. Based on this representation, Lender agrees that I will not have personal liability on the debt pursuant to this Agreement. 5. Chapter 13 Cases The Catch-22 in bankruptcy is that historically a lender has wanted a case to be out of bankruptcy in order to consider loss mitigation. However, often times the lender was not willing to give any assurance that a loan modification would be offered and, therefore, the debtor would opt to remain under the protection of the Bankruptcy Code. 6. In most bankruptcy courts, loss mitigation can take place at any time during the bankruptcy case. If borrowers are in the HAMP trial payment period when the bankruptcy is filed, it might not be finalized prior to plan confirmation, so some courts have been continuing the confirmation hearing to allow for completion of the HAMP process. Plan confirmation most often occurs within 60 to 75 days of the petition filing. Under this approach, the plan that is ultimately confirmed and the budget that is filed are accurate, and represent the current financial snapshot of the debtor. Where the court will not continue confirmation, the plan must comply with the Bankruptcy code (e.g. provide for cure of the arrearage and maintenance of post-petition payments). 7. Many of the Courts across the country are still working through the logistics of the best way to effectuate loss mitigation in a Bankruptcy. Arguably, Court approval is needed in all Bankruptcy cases. An example of what some Courts want to take place in a Chapter 13 case can be found in the requirements instituted by the Chapter 13 Trustee in Cincinnati where the Trustee wants the Debtor to prepare/file: proposed motion to modify plan; amended schedules I & J (evidencing the proposed budget); the above documents along with Application to Incur Debt, so that the Trustee can make an informed decision regarding the loan modification; and a proposed Loan Modification Agreement and/or documentation evidencing the proposed Loan Modification must be submitted with the Application to Incur debt, otherwise the Application to Incur Debt may be denied by the Trustee. Further, depending on the jurisdiction, limited relief from stay may be advisable before finalizing loan-modifications as often times, the entry of an order granting relief from stay is the event that allows a Chapter 13 Trustee to discontinue payments on a creditor s prepetition arrearage claim and in certain jurisdictions, discontinue post-petition conduit payments. Relief from stay also allows creditors to communicate freely with borrowers. Consider agreeing to termination of the automatic stay for the limited purpose of loss mitigation. 3 P age

4 The National Association of Chapter 13 Trustees Mortgage Subcommittee is working on a uniform process and form(s) for effectuating loss mitigation to streamline loss mitigation nationally. More details to come in late In most jurisdictions, it is advisable to refrain from Amending a Proof of Claim after a loan modification is finalized, including modifications where part of the principal has been waived under the new Treasury Principal Forgiveness Program. After all, a modification does not change the amount of the creditor s Proof of Claim which is established and frozen as of the date the Bankruptcy is filed. Instead, most Courts and Trustees want the Proof of Claim to remain as filed coupled with an Order from the Court directing the Trustee to cease further payment on the claim and alerting all parties to the new terms of the loan under the modification. 9. Loss mitigation can also take on other forms in Bankruptcy such as an Agreed Orders allowing the cure of post-petition arrearage: o over a period of time (e.g. 6 months); o via a Supplemental Proof of Claim (need to review plan to make sure it can absorb the arrearage); o By allowing it to survive the bankruptcy/discharge; or o Placing arrearage at end of the loan. 10. Changes to Legislation/the Bankruptcy Code On February 1, the Senate Judiciary Committee held a hearing on S. 222, the "Limiting Investor and Homeowner Loss in Foreclosure Act of 2011," initiated by Senator Sheldon Whitehouse (D-RI). The legislation would provide bankruptcy courts with the authority to implement loss mitigation programs/rules within their own jurisdictions. A judicial challenge to that authority was rejected late last year. This proposed legislation does not provide cramdown authority; it would amend Bankruptcy Code Section 105 by adding at the end the following language: "(e) Without limiting the court's authority under subsection (d) or under any other statute or rule, the court, by local rule or order, may establish and maintain a loss mitigation program for the consideration and negotiation of consensual alternatives to avoid foreclosure between an individual debtor and the holder of a claim secured by a security interest in real property that is the debtor's principal residence." The bill would also add a conforming amendment to Section 362(e) addressing when a party in interest requests relief from the automatic stay under Section 362(d). 4 P age

5 B. Loan Modification: The Players-Who decides if I receive a modification? 1. From the perspective of Mortgage Backed Security holders, a modification that reduces the interest rate has the effect of reducing the trust s cash receipts, compared to what would have been received had the mortgage note been collected according to its original terms. 2. Contractual Terms- Pooling and Servicing Agreement. The contract governing the servicer s obligations to the securitization trustee, are governed by the pooling and servicing agreement. Usually, the pooling and servicing agreement contains express provisions addressing the servicer s ability to grant loan modifications. While some variations exist, pooling and servicing agreements are standardized for the most part. Most securitizations are structured to be what the Internal Revenue Code defines as a Real Estate Mortgage Investment Conduit ( REMIC ) and must adhere to the requirements of REMIC status in order to avoid risking tax consequences. While the REMIC regulations generally restrict substitution and significant modification of loans, a safe harbor in the regulations permits modifications that are occasioned by default or a reasonably foreseeable default. More restrictive variations occasionally occur: some agreements may raise the threshold to a requirement that default be at least imminent, and occasionally a provision placing an overall cap such as 5% of the securitized pool on the number of loans that the servicer may modify under any circumstance. 5 P age Safe Harbor from Tranche Warfare : As part of Helping Families Save Their Homes Act of 2009 (HFSTHA), Congress established the Servicer Safe Harbor by amending the Truth in Lending Act for the purpose of providing a safe harbor to enable such servicers to modify and refinance mortgage loans under a qualified loss mitigation plan. Treasury has determined that each residential loan modification under HAMP (including Principal Reduction Alternative (PRA) modifications) and 2MP, each modification and refinance under FHA Refinance and FHA2LP, as well as each short sale and deed-in-lieu of foreclosure under HAFA and each forbearance plan under UP, is a qualified loss mitigation plan as defined in the Servicer Safe Harbor. 3. Consumers should first call the mortgage company to which he/she sends their monthly mortgage payments to determine who owns or insures their loan. Consumers should check their monthly mortgage bill or payment booklet for a phone number or web site address. If a loan is insured by the Federal Housing Administration, the consumer should contact and they will be able to provide you with further assistance. If a loan is insured by the Veterans Administration, the consumer should call Veterans Affairs at to reach the nearest Loan Guaranty office. If a loan is insured by Rural Development, the consumer should call 1-(866) to speak to a representative at USDA s Centralized Servicing Center. 4. The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is a

6 6 P age government sponsored enterprise (GSE) of the United States federal government. FHLMC was created in 1970 to expand the secondary market for mortgages in the U.S. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases FREDDIE (8am to 8pm EST) 5. The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968 as a government-sponsored enterprise (GSE), but founded in 1938 during the Great Depression. The corporation's purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers FANNIE (8am to 8pm EST) 6. The Government National Mortgage Association (GNMA, also known as Ginnie Mae) is a U.S. government-owned corporation within the Department of Housing and Urban Development (HUD). Ginnie Mae provides guarantees on mortgage-backed securities (MBS) backed by federally insured or guaranteed loans, mainly loans issued by the Federal Housing Administration, Department of Veterans Affairs, Rural Housing Service, and Office of Public and Indian Housing. Ginnie Mae securities are the only MBS that are guaranteed by the United States government. The GNMA was created by the United States Federal Government through a 1968 partition of the Federal National Mortgage Association. 7. The United States Department of Housing and Urban Development, also known by as HUD, is a Cabinet department in the Executive branch of the United States federal government. Although its beginnings were in the House and Home Financing Agency, it was founded as a Cabinet department in 1965, as part of the "Great Society" program of President Lyndon Baines Johnson, to develop and execute policy on housing and cities. 8. Mortgage Electronic Registration Systems (MERS) is a privately-held company that controls a confidential electronic registry to track mortgages and the changes in servicing rights and ownership of mortgage loans in the United States. MERS serves as the mortgagee for lenders, investors and their loan servicers in the county land records. This eliminates the need to file assignments in the county land records which lowers costs for lenders and consumers by reducing county recording revenues from real estate transfers and provides a central source of information and tracking for mortgage loans. Dial the toll-free MERS Servicer Identification System at , an automated

7 7 P age touch-tone system. Search by MIN, property address or FHA/VA/MI Certificate NOTE: MERS does not offer loan modifications. MERS is mentioned in the materials simply to point MERS out as a resource to determine the servicer of the loan. C. LOSS MITIGATION AT LERNER, SAMPSON & ROTHFUSS 1. Lerner, Sampson & Rothfuss is recognized as a leader in creditor representation, mainly focusing on creditors rights in the foreclosure and bankruptcy fields. For obvious reasons, the industry has taken a turn in the last few years with a new focus on saving loans rather than extinguishing them through foreclosure actions. In May of 2007, Lerner, Sampson and Rothfuss established an in-house loss mitigation department to assist lenders and investors who were seeking assistance with their loss mitigation work. The department originated with three employees and has grown to over two dozen trained and compassionate customer service representatives whose primary responsibilities are to assist homeowners who wish to avoid foreclosure and either retain or relinquish their homes. The firm is involved in several pilot and established programs with servicers and investors to assist them in reaching out to borrowers. 2. The following is an outline of how our system works: For certain clients and investors, a loss mitigation letter is mailed to borrowers at the time their mailing address is confirmed through proper service of the foreclosure complaint or when a Bankruptcy is filed. The letter gives the borrowers a summary of their loss mitigation options and notice of specific financial information to return to our office for loss mitigation review. LS&R has a designated telephone line as well as an address for the borrowers to use to contact our loss mitigation department directly. The loss mitigation letter we send has been found to be an efficient means of contact to put borrowers on notice that they have the option to contact our office for information. We are oftentimes successful in helping people save or relinquish their homes and avoid foreclosure by putting them in contact with their lenders. If a borrower makes contact with our office, our loss mitigation team: provides the borrower a detailed description of potential loss mitigation options; determines which option the borrower is most interested in; determines how the borrower s financial situation has changed since the delinquency occurred; and notifies the borrower of the necessary financial information needed in order to pursue their loss mitigation interest with their lender, and in turn, compiles the information provided in

8 8 P age order to attempt to provide the servicer with a complete loss mitigation package in order to begin the review. Once the steps above are completed, and depending on the servicer or investor guidelines we follow, we either: facilitate a conference call with the borrower and client/servicer's loss mitigation area so they can initiate the loss mitigation review; and/or collect financial information from the borrower for certain servicers or investors, and determine which loss mitigation options they have a possibility of qualifying for. In most circumstances, our office does not have the authority to make the final decision on acceptance of a borrower s workout offer; however, we do have some clients and investors who allow us to make recommendations contingent on the borrower s qualifications which are based on a preliminary calculation of the financial information provided. 3. As a general rule, the options which may be available to borrowers, and the information necessary for the lender to make a decision, are as follows: a. Repayment agreement: Borrowers sign an agreement to make regular monthly mortgage payments, plus a portion of the delinquency each month, for a specific time period to bring the account current. What is needed? Hardship Affidavit (FNMA form 1021) IRS Form 4506T Two most recent pay stubs, or profit and loss statements, for each borrower Two most recent bank statements for each borrower Two most recent tax returns for each borrower b. Short Sale: The property may be sold for an amount less than is owed, with servicer and/or investor/insurer approval. Most servicers, investors and/or insurers require their portion of the proceeds on the property to be within a certain percentage of its fair market value (FMV), which is usually around 90%, but varies according to the guidelines they have in place. What is needed: Hardship Affidavit (FNMA form 1021) IRS Form 4506T Two most recent pay stubs, or profit and loss statements, for each borrower Two most recent bank statements for each borrower Two most recent tax returns for each borrower

9 Listing Agreement Purchase Offer/Contract Proposed HUD1 c. Deed in Lieu of Foreclosure: The property may be deeded back to the servicer and/or investor/insurer. Most servicers, investors and/or insurers require a 90 day listing agreement which listed the property at fair market value (FMV). This goes against the common logic that they should try to re-coup the full amount of the debt. What is needed: Hardship Affidavit (FNMA form 1021) IRS Form 4506T Two most recent pay stubs, or profit and loss statements, for each borrower Two most recent bank statements for each borrower Two most recent tax returns for each borrower Realtor s Listing Agreement (fair market value) Appraisal or comps (if available) 4. Net Present Value Calculating Net Present Value Most servicers, before they agree to modify a loan, first determine whether a modification will increase the net present value (NPV) of the loan relative to foreclosure. Pooling and Servicing Agreements normally impose this NPV test for private-label loans and require servicers to maximize the recovery for the benefit of the investors in the trust as a whole. Servicers implement this requirement by choosing the higher NPV, as between a loan workout and foreclosure. The GSEs, like the HAMP program, also impose their own NPV test and many servicers also apply their own NPV test to distressed loans held in their own portfolio. Although the NPV requirement sounds formulaic, PSAs give servicers of private-label RMBS a high degree of latitude in how to calculate it. This discretion allows the servicer to decide on the likely sales price from a foreclosure, the discount rate to apply to the reduced revenue stream from a loan modification, and the likelihood that the borrower will redefault. There are four key factors in servicers NPV determinations: First, servicers are concerned about the risk that a modified loan may redefault. Second, some distressed loans self-cure. Third, the higher the discount rate (the more focused servicers are for cash presently), the higher the likelihood of loan modifications. Fourth, Moral Hazard Concerns: will borrowers who are now current be encouraged to default on their loans? 9 Page

10 5. Home Affordable Modification Program-HAMP a. 10 P age

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12 After determining a borrower's eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower's total pretax monthly income: First, reduce the interest rate to as low as 2%, 12 Page

13 Next, if necessary, extend the loan term to 40 years, Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount. b. Government Loans: Mortgage loans insured or guaranteed by a federal government agency, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Department of Agriculture s Rural Housing Service (RHS), are eligible for modification under HAMP to the extent the applicable agency has issued HAMP guidance. (1) FHA announced FHA-HAMP to provide assistance to borrowers with FHA-insured loans who are unable to meet their mortgage payments. The FHA Home Affordable Modification Program is part of the federal government s Making Home Affordable program. The goal of this program is to help homeowners with an FHA-insured mortgage lower their monthly mortgage payments to a sustainable level. Treasury FHA-HAMP provides pay-for-performance compensation for borrowers and payfor-success compensation to servicers for FHA-insured first lien Non-GSE Mortgages that are modified under FHA-HAMP on or after August 15, For specific guidance related to eligibility, underwriting and administration of FHA- HAMP, consult the guidance issued by FHA in Mortgagee Letter and other existing or future guidance issued by FHA. Most servicer s monthly mortgage statements will tell you whether it is an FHA loan (e.g. page 2 of Bank of America s Monthly Mortgage Statements will say, for example: 30YrFHA ). Typical requirements: Debtor has had FHA-insured mortgage for at least 12 months; Debtor is the owner of the home and lives in it as your primary residence; Debtor has made at least four full payments during the life of your loan; Debtor is having trouble paying mortgage due to an increase in mortgage payment, a reduction in income or other hardship that has increased expenses, such as medical bills; Total amount paid each month (including mortgage principal, interest, taxes, flood and hazard insurance, and homeowners association dues, if applicable) is generally more than 31% of current gross (before taxes and deductions) income. 13 P age

14 (2) VA announced VA-HAMP to provide assistance to borrowers with VA guaranteed loans who are unable to meet their mortgage payments. Treasury does not provide incentive compensation related to VA-HAMP. For specific guidance related to eligibility, underwriting and administration of VA-HAMP, consult the guides issued by VA (e.g. Circular ). (3) RHS announced Special Loan Servicing to provide assistance to borrowers with Single Family Housing Guaranteed Loan Program loans who are unable to meet their mortgage payments. RDHAMP provides pay-for-performance compensation for borrowers and pay-for-success compensation for servicers for RHS-guaranteed first lien Non-GSE Mortgages that are modified under Special Loan Servicing on or after September 24, For specific guidance related to eligibility, underwriting and administration of Special Loan Servicing, consult the final rule published by RHS (75 Fed. Reg. 52,429 (August 26, 2010)) (Final Rule) and other existing or future guidance issued by RHS. c. Bankruptcy Per Treasury's Supplemental Directive 10-02, effective June 1, 2010, which has now been incorporated into Version 3.0 of the Making Home Affordable Program Handbook for Servicers of Non-GSE Mortgages, when a borrower in an active Chapter 13 bankruptcy is in a trial period plan and the borrower has made post-petition payments on the first lien mortgage in the amount required by the trial period plan, a servicer must not object to confirmation of a borrower s Chapter 13 plan, move for relief from the automatic bankruptcy stay, or move for dismissal of the Chapter 13 case on the basis that the borrower paid only the amounts due under the trial period plan, as opposed to the non-modified mortgage payments. Borrower eligibility is based on meeting specific criteria including: 1) borrower is delinquent on their mortgage or faces imminent risk of default; 2) property is occupied as borrower's primary residence; 3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties. d. Dodd-Frank Certification Requirement The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provides that no person is eligible to begin receiving assistance under the Making Home Affordable ( MHA ) Program if such person, in connection with a mortgage or real estate transaction, has been convicted within the last 10 years of any of the following: o Felony larceny, theft, fraud, or forgery; o Money laundering; or o Tax evasion. 14 P age

15 The Dodd-Frank Certification requirement became effective September 21, All HAMP and 2MP, TPPs, permanent HAMP, 2MP, Treasury FHA HAMP and RD-HAMP modifications, offers relating to such TPPs and permanent modifications, and HAFA short sale and DIL offers outstanding as of the effective date of this requirement are not impacted by the Dodd-Frank Certification requirement. e. The Home Affordable Unemployment Program The Home Affordable Unemployment Program (UP) provides assistance to borrowers who are unable to make their mortgage payments as a result of unemployment. UP grants qualified borrowers a forbearance period of at least three months, during which mortgage payments are reduced or suspended, allowing borrowers to seek employment without the fear that they will lose their homes to foreclosure. f. The Home Affordable Foreclosure Alternatives The Home Affordable Foreclosure Alternatives (HAFA) Program provides opportunities for borrowers to transition to more affordable housing through a short sale or deed-in-lieu (DIL) of foreclosure when they can no longer afford to stay in their home but want to avoid foreclosure. HAFA provides financial incentives to servicers, investors, and borrowers that utilize a short sale or a DIL to avoid a foreclosure on a HAMP-eligible loan. g. The Second Lien Modification Program The Second Lien Modification Program (2MP) is designed to work in tandem with HAMP to offer borrowers with second mortgage liens even greater affordability. Under 2MP, when a borrower s first lien is modified under HAMP and the servicer of the second lien is a 2MP participant, that servicer must offer to modify the borrower s second lien according to a defined protocol and/or to accept a lump sum payment from Treasury in exchange for full or partial extinguishment of the second lien. All servicers of eligible second lien Non-GSE Mortgages may participate in 2MP. A servicer need not service the related first lien or participate in HAMP in order to participate in 2MP. h. Treasury/FHA Second Lien Program The Treasury/FHA Second Lien Program (FHA2LP) is designed to work in tandem with the FHA Refinance of Borrowers in Negative Equity Positions (FHA Refinance) Program announced by FHA in Mortgagee Letter FHA Refinance provides greater affordability for borrowers whose homes are worth less than the remaining amounts owed under their mortgage loans (negative equity). FHA Refinance allows borrowers who are current and in a negative equity mortgage to restructure their debt and refinance into an FHA-insured loan where the unpaid principal balance (UPB) of the original first lien mortgage is written down by at least 10 percent and the amount of all mortgage debt, after the FHA refinance, does not exceed 115 percent of the current value of the property. To facilitate this FHA refinance opportunity, Treasury provides incentives under FHA2LP to 15 P age

16 servicers and investors when there is a partial or full extinguishment of second lien mortgage loans as part of an FHA Refinance. All servicers of eligible second lien Non-GSE Mortgages may participate in FHA2LP. A servicer need not service the related first lien or participate in HAMP in order to participate in FHA2LP. i. MHA Interactions with the Hardest Hit Fund The Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets (Hardest Hit Fund or HHF) provides federal funding to help families in states that have been hit the hardest by the housing crisis and economic downturn. In these states, state Housing Finance Agencies (HFAs) are implementing programs to prevent foreclosures and stabilize housing markets. In some cases, the assistance the HFAs provide under HHF can supplement and extend assistance provided through MHA. To maximize the effectiveness of their foreclosure mitigation efforts, servicers should use reasonable efforts to ensure that federal funds are used efficiently and that HHF programs complement MHA programs. j. Effective February 1, 2011, Treasury s Borrower Support Centers The HOPE Hotline, a 24-hour telephone help-line operated by the non-profit, Homeownership Preservation Foundation, provides homeowners with free foreclosure prevention information and housing counseling referrals. Under contract with the Program Administrator, the HOPE Hotline assists borrowers with a preliminary assessment of their eligibility for MHA Programs and also connects borrowers with detailed program or denial questions to MHA Help, a team of housing counselors dedicated exclusively to working with borrowers and servicers to resolve MHA escalated cases. Treasury established a similar resolution resource, the HAMP Solution Center (HSC), to manage escalated cases received from housing counselors, government offices, and other third parties acting on behalf of a borrower. Specially trained personnel at MHA Help and HSC handle Escalated Cases evaluating the circumstances and status of a borrower s request for assistance under an MHA Program and working with the servicer to identify and resolve the case in a manner consistent with MHA program guidelines. To facilitate review and response to cases escalated to servicers by HSC and MHA Help, servicers must report to HSC or MHA Help the status of referred Escalated Cases and, upon request, provide all necessary information required to assess the borrower s Escalated Case, including, but not limited to: o Debt and income inputs, assumptions, and calculations used to evaluate the borrower; o Name of the investor/guarantor and Pool ID if the reason for denial is Investor/Guarantor Not Participating, unless restricted by confidentiality; o Correspondence by either the borrower or the servicer relative to the applicable MHA Program evaluation; o Timeline of events constructed by the servicer relative to the applicable MHA Program o evaluation; and o Other relevant data relied upon by the servicer in conducting the evaluation. o Servicers must permit calls with MHA Help or HSC to be recorded for quality control and 16 P age

17 training purposes. All servicers will be required to have written procedures and personnel in place to provide timely and appropriate responses to borrower inquiries and disputes that rise to the level of an Escalated Case, which includes, but is not limited to: o Allegations that the servicer did not assess the borrower for the applicable MHA Program(s) according to program guidelines; o Inquiries regarding inappropriate program denials or the content of a Non-Approval Notice; o Initiation or continuance of foreclosure actions in violation of Section 3 of Chapter II; or o Cases referred to the servicer by HSC and MHA Help. The servicer may handle Escalated Cases received from HSC, MHA Help, a borrower, an authorized advisor, Treasury, other federal agencies or elected officials (each, a Requestor). Servicers must designate one or more persons to comply with these requirements and to handle inquiries that rise to the level of an Escalated Case. It is also important to know that the borrowers must submit a written authorization to the servicer which provides authority for the servicer to discuss the account with any retained attorney, realtor, HUD Housing agent, or other third party. The foreclosing law firm will also need a written authorization do discuss the account with any third party, other than the borrower s attorney of record. k. Home Affordable Refinance Program Designed to help make monthly mortgage payments more affordable for customers who may not have sufficient equity in their home to qualify for traditional refinancing. Debtor may be eligible for refinancing home loan under the Home Affordable Refinance Program (HARP), if: Home loan is owned by Fannie Mae or Freddie Mac; Mortgage was taken out before January 1, 2009; Loan was sold to Fannie Mae or Freddie Mac on or before May 1, 2009; and First mortgage is 80% or more of the home s value (this is also referred to as your loan-to-value (LTV) ratio) D. The National Mortgage Settlement 1. On February 9, 2012, the Attorney General announced that the federal government and 49 states (Borrowers from Oklahoma will not be eligible for any of the relief directly to homeowners because Oklahoma elected not to join the settlement) had reached a settlement agreement with the nation s five largest mortgage servicers to address mortgage servicing, foreclosure, and bankruptcy abuses (the National Mortgage Settlement ): Ally/GMAC Bank of America 17 Page

18 18 P age Citi JP Morgan Chase Wells Fargo Loans owned by Fannie Mae or Freddie Mac are not impacted by this settlement. The settlement provides benefits to borrowers whose loans are owned by the settling banks as well as to many of the borrowers whose loans they service. On April 4, 2012, the United States District Court for the District of Columbia entered orders approving the settlement. The National Mortgage Settlement settles certain state and federal investigations relating to mortgage servicing abuses including abuses in the bankruptcy process. The settlement provides as much as $25 billion in relief to distressed borrowers and direct payments to states and the federal government. It s the largest multistate settlement since the Tobacco Settlement in General information concerning the National Mortgage Settlement including settlement documents, general FAQs, and other important documents can be found at: 2. The settlement makes important progress in the following areas, according to the National Consumer Law Center: Establishing strong standards for how mortgage servicers handle loan modifications, including requiring a review of a loan modification application prior to initiation of any foreclosure. Setting limitations on abusive fees and charges, including late fees, title and appraisal fees, and forceplaced insurance; Providing some principal reductions to struggling homeowners, including those in lowerincome areas and communities of color; Preserving a homeowner's right to defend a foreclosure against mortgage company and servicer abuses. Forbidding waiver of claims in the loan modification context; and Allowing homeowners to pursue independent litigation against mortgage servicers for abusive acts. The settlement does not: Release any criminal liability or grant any criminal immunity. Release any private claims by individuals or any class action claims. Release claims related to the securitization of mortgage backed securities that were at the heart of the financial crisis. Release claims against Mortgage Electronic Registration Systems or MERSCORP. Release any claims by a state that chooses not to sign the settlement.

19 19 P age End state attorneys general investigations of Wall Street related to financial fraud or the financial crisis. 3. Loss Mitigation During Bankruptcy. a. Servicer may not deny any loss mitigation option to eligible borrowers on the basis that the borrower is a debtor in bankruptcy so long as borrower and any trustee cooperates in obtaining any appropriate approvals or consents. b. Servicer shall, to the extent reasonable, extend trial period loan modification plans as necessary to accommodate delays in obtaining bankruptcy court approvals or receiving full remittance of debtor's trial period payments that have been made to a chapter 13 trustee. In the event of a trial period extension, the debtor must make a trial period payment for each month of the trial period, including any extension month. c. When the debtor is in compliance with a trial period or permanent loan modification plan, Servicer will not object to confirmation of the debtor's chapter 13 plan, move to dismiss the pending bankruptcy case, or file a MRS solely on the basis that the debtor paid only the amounts due under the trial period or permanent loan modification plan, as opposed to the non-modified mortgage payments. d. Transfer of Servicing of Loans Pending for Permanent Loan Modification. Ordinary Transfer of Servicing from Servicer to Successor Servicer or Subservicer. At time of transfer or sale, Servicer shall inform successor servicer (including subservicer) whether a loan modification is pending. Any contract for the transfer or sale of servicing rights shall obligate the successor servicer to accept and continue processing pending loan modification requests. Any contract for the transfer or sale of servicing rights shall obligate the successor servicer to honor trial and permanent loan modification agreements entered into by prior servicer. Transfer of Servicing to Servicer. When Servicer acquires servicing rights from another servicer, Servicer shall ensure that i.t will accept and continue to process pending loan modification requests from the prior servicer, and that it will honor trial and permanent loan modification agreements entered into by the prior servicer. 4. Compensation to Borrowers Approximately $1.5 billion of the settlement funds will be allocated to compensation to borrowers who were foreclosed on after January 1, 2008 and before Dec. 31, The National Mortgage Settlement Administrator will mail Notice Letters and Claim Forms in late September through early October 2012 to those borrowers who lost their home due to foreclosure between January 1, 2008 and December and whose loans were serviced by one of the five mortgage servicers that

20 are parties to the settlement. Debtor may be eligible to receive a payment of at least $ as part of the National Mortgage Settlement. This estimated payment amount is based on 100% of all eligible borrowers submitting claim forms, and therefore the payment you receive will very likely be higher. a. Are these cash payments under the settlement property of the bankruptcy estate? General Rule: Cash payments for acts occurring both pre- and post-petition become property of the Chapter 13 Bankruptcy Estate. b. Filing a Claim for Settlement Funds There is a secure claim filing site at You must have your personalized claimant ID number, which is located on the Notice Letter and Claim Form you received, to submit your Claim Form online. If Debtor has questions or needs assistance filing the claim, Debtor may call the Settlement Administrator toll free at To file a claim on the National Mortgage Settlement Claim Filing Site: STEP 1. CHOOSE HOW TO FILE. If Debtor decides to file online, Debtor will need the customized claimant ID number from the top of the letter Debtor received. Filing a claim in this Settlement is designed to be an easy process and Debtors are encouraged on the site to NOT PAY ANYONE TO FILE THE CLAIM. STEP 2. REVIEW NAME, ADDRESS AND CONTACT INFORMATION. Review the pre-printed name and address at the top of the form and make any corrections to Debtor s current mailing address on the following screens. STEP 3. DETERMINE DEBTOR S ELIGIBILITY. Review each of the three statements and check the boxes that apply to Debtor on the following screens. Debtor must check at least one of these boxes on the Claim Form in order to be eligible to receive a payment. Financial hardships Loan modification problems Foreclosure errors Hardships that prevented Debtor from paying your May include but are not limited to: May include but are not limited to: 20 P age

21 loan may include but are not limited to: A reduction in income due to divorce, unemployment, or a change in employment; Financial losses such as medical expenses; Unexpected home or auto repairs; or Debtor was deceived or defrauded when Debtor received mortgage loan regarding ability to make the payment; or An unanticipated increase in Debtor s mortgage payment amount. Mortgage servicer company did not offer any ways to avoid foreclosure; Debtor tried to apply for a loan modification but Debtor s application was not acted upon before foreclosure; Mortgage servicer lost documents that Debtor submitted in support of modification application; Debtor applied for a loan modification but mortgage servicer turned you down due to errors on its part; Debtor was making payments under a trial modification but were put into foreclosure anyway; or There were other errors in Debtor was overcharged for fees that contributed to delinquency in payments; Payments were misapplied or there were other payment accounting errors by mortgage servicer which caused or contributed to delinquency or foreclosure; Debtor received inaccurate payment information which caused or contributed to your delinquency or foreclosure; or There were significant errors or misconduct in the foreclosure process. Possible examples include failure to receive proper notice of foreclosure, inaccurate information in foreclosure documents, improperly executed or otherwise defective foreclosure 21 P age

22 the handling of the loan modification application. documents ( robosigning ), improper court filings, or other mishandling of the foreclosure process by the servicer or its attorneys. STEP 4. SIGN THE FORM. All borrowers should sign the form if they are able. If eligible, the payment amount to be made for the Mortgage Loan identified on the Claim Form is $840, regardless of the number of borrowers under the loan. When the check is issued for the payment of the claim, all borrowers names will be printed on the check. If all borrowers are unable to sign this form, indicate the reason all borrowers did not sign on the following screens. a. In the case of a divorce or separation of borrowers, each borrower may submit a separate Claim Form. One check will be issued in the name of all borrowers unless separate Claim Forms are submitted showing different addresses. If there are different addresses or if you notify the Settlement Administrator of the divorce/separation, the payment of the claim will be divided into equal shares for each borrower making a claim. b. If the borrower is deceased, or under a guardian, or if someone has Power of Attorney for the borrower, the representative with authority to act on behalf of the borrower should sign the form and indicate the nature of their authority. In some cases, the Settlement Administrator may request documentation to prove the representative had authority to sign the form on behalf of the borrower. When the check is issued for payment of the claim, it will be made in the borrower s name. STEP 5. SUBMIT THE FORM. Submit claim online by January 18, 2013, or mail the form in the prepaid envelope provided, postmarked no later than January 18, Servicing Standards The Banks must implement extensive new mortgage servicing standards, including provisions specific to borrowers in bankruptcy. Joseph A. Smith, Jr., Monitor of the National Mortgage Settlement, announced on October 2, Page

23 that the five banks participating in the Settlement are now required to be in full compliance with the agreement s 304 servicing standards, or rules that guide their interaction with consumers. In response to this deadline, he released the following statement: Today is the 180th day since the entry of the consent judgments comprising the National Mortgage Servicing Settlement. As of today, the five banks subject to the Settlement are required to operate in full compliance with its servicing standards. I will conduct careful and thorough reviews of the banks processes to assure and verify that they are compliant with the Settlement s rules. The servicing standards require, among other things: A single point of contact at each Bank for borrowers in bankruptcy, who want information or assistance when they fall behind on their mortgage payments; New processes to ensure that the Banks provide accurate information about the amount that borrowers in bankruptcy owe on their mortgages; Better dispute resolution processes; Clear itemization of the principal, interest, fees, expenses and other charges incurred prior to bankruptcy that the Banks claim in bankruptcy cases; Prompt posting of payments and proper designation of pre-and post- petition payments and charges; Timely disclosure of fees, expenses, and charges incurred after a ` borrower files for chapter 13 bankruptcy. a. Mortgage Settlement Monitor Releases Progress Report On August 29, 2012 Joseph A. Smith, Jr., Monitor of the National Mortgage Settlement, released a report that outlines details about the settlement, steps his office has taken to implement it and progress made by the five banks that are parties to the settlement to date. It has been nearly five months since the settlement went into effect, and I believe it is important to report on our progress, said Smith. This report is not required by the settlement and contains information given voluntarily to me by the banks. It is intended to be the basis of a national conversation about the servicers efforts to meet their obligations under the settlement. The report discloses that the banks have granted $10.56 billion in consumer relief to borrowers between March 1 and June 30, Additionally, first lien principal reduction trials were offered and begun for about 28,000 homeowners, totaling approximately $3 billion of potential relief, said Smith. This information is self-reported and has not been confirmed by the professional firms working with me. Further, it represents gross dollar amounts and cannot be used to evaluate progress toward the banks $20 billion obligation. 23 P age

24 In addition, the report provides an update on the banks implementation of the settlement s servicing standards. As of July 5, the servicers reported to me that 56 servicing standards have been incorporated into their business processes, continued Smith. Implementation of the mortgage servicing standards outlined in the settlement can be an important contribution to reform of the mortgage finance system. More hard work remains as the banks work to meet their obligations. My colleagues and I look forward to that work and to keeping policymakers and the public informed of our progress. The report contains a summary of the settlement and its terms, along with information on how Smith has set up the Office of Mortgage Settlement Oversight to carry out his duties as Monitor. The report also provides an update on servicing standards implementation and summarizes the data that servicers voluntarily provided to Smith as progress of relief given between March 1, 2012 and June 30, b. Can borrowers in bankruptcy participate in the Settlement and receive financial assistance from other sources? Yes. Borrowers, including borrowers in bankruptcy, may participate in the programs offered under the Settlement and other programs. For example, borrowers may be eligible for a separate restitution process administered by the federal banking regulators, including the Office of the Comptroller of the Currency (the OCC ). For more information about the federal banking regulator claims process, please visit or call c. How does the Settlement address the Banks filings in bankruptcy courts going forward? The Settlement imposes new standards on the Banks to ensure the accuracy of information they provide to bankruptcy courts. These standards are designed to ensure that the Banks provide accurate information about the amount that borrowers in bankruptcy owe on their mortgages. Moreover, under the new servicing standards, the Banks must implement better dispute resolution processes. If a Bank files inaccurate or misleading documents in a bankruptcy case, a borrower can use these new procedures and make a complaint with the Bank. In addition, with respect to proofs of claim and certain affidavits attached to documents filed in bankruptcy courts, the Banks must correct any significant inaccuracies promptly and also provide notice of the correction to the affected borrower or counsel to the borrower. d. What kind of information must the Banks provide concerning a mortgage when a borrower files for bankruptcy? For a borrower in a chapter 13 (repayment) case, if a Bank files a proof of claim, the Bank must include an accurate and clear statement of exactly what the Bank claims the borrower owes. That statement must itemize the principal, interest, fees, expenses, and other charges that the Bank claims is owed as of the filing of the bankruptcy case. 24 P age